A legitimate way to fund a temporary cash crisis now or to have funds on-hand if the need arises is by taking cash out of the equity of your home. Most homeowners can pull out the difference in 80 percent of the fair market value of their home and what they currently owe on the home.
Enter refinancing. There are many reasons cited for refinancing a home such as;
- Lowering the monthly payment
- Getting rid of private mortgage insurance
- Combining mortgages
- Consolidating debt
- Converting an ARM to a fixed-rate mortgage
- A divorce, death or significant partner split
- Or to just pull out cash for another reason entirely
If you need to deal with unexpected living expenses or potentially future lost wages, this could be a good reason to do a cash-out refinance. But do consider that it may increase your monthly payment that would result in higher expenses later if you run into income issues.
Recently, some lenders have raised their minimum credit score requirements. But if you have good credit and the ability to repay the loan you should be able to refinance. Lenders are reporting that their processing time is taking longer during the current COVID-19 pandemic but they have implemented procedures to safely facilitate the application and the appraisals.
If you are a homeowner with an FHA loan you are available for a streamlined process due to FHA already insuring your current mortgage but your cash-out is limited to $500. But even though you cannot pull out your equity, refinancing may lower your payment thus lowering your expenses.
Refinancing an existing FHA loan does not require income verification or an appraisal, unlike a conventional loan that requires a job or some other work-related income. But the borrower cannot be delinquent on the current FHA loan and it must be at least six months old.
If you refinance, you will incur closing costs that you can choose to pay in cash or add o the amount being refinanced. The breakeven point to recapture the cost of refinancing is determined by dividing the monthly savings into the cost of refinancing. If you stay in the home less than that time, refinancing could be an unnecessary expense.
HELOC, a home equity line of credit, is another alternative for homeowners. With a HELOC, you do not incur interest until you use the line of credit. It is a variable rate home equity loan like your credit cards which you can borrow up to a certain limit when you need to and repay it over time.
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